Hi.

[INAUDIBLE] here.

And in this video, we'll be exploring the statement

of cash flows under IFRS.

The statement of cash flows is the last statement

before the notes to the financial statements.

Remember, this is for public corporations who must use IFRS

and private corporations who choose to use IFRS.

In our last video on the statement

of financial position, I demonstrated

the interconnection between the various statements using

slides.

Understanding the interconnection

between the statements is critical

when developing the statements.

Today, to show you a different view,

I'm going to use a matrix.

Now you'll see in the far left column, the statement name

and the amount that is carried to another statement.

If you follow the row to your right,

you see which statement this amount is carried to.

Let's focus on just one row, so that you can see an example.

Here, you can see that the profit or loss

amount from the income statement is

used as an opening number in the statement

of comprehensive income.

It is also added or deducted from the opening retained

earnings on the statement of changes in equity.

Finally, it's used as an opening number

for operating activities in the statement of cash

flows indirect method.

You can also see, very quickly, that the profit or loss

amount is never used directly in the statement

of financial position.

As you can see, this matrix quickly

shows you the interconnection between the different financial

statements.

Let's go back to the full matrix and focus on the last row.

It shows that cash from the current asset

section of the statement of financial position

is used as the closing cash on the statement of cash flows.

If you look at the last column in the matrix,

you see the two statements which are

interconnected to the statement of cash flows,

the profit or loss from the income statement,

and the closing cash balance from the statement

of financial position.

Although you don't have to use a matrix

to understand the interconnection

between the various financial statement,

it is one way to understand this concept.

The statement of cash flows can be

prepared using the direct or indirect method.

Let's quickly look at the differences before we move on.

The direct method lists the inflows and outflows

from each type of operating activity a company performs.

Cash flow categories can include cash collected from customers,

cash paid to suppliers, and cash paid to employees,

just to list a few.

This method is preferred by IFRS because it

is more informative for users, clearly showing the sources

and uses of cash in operations.

The indirect method focuses on the differences

between net income under accrual accounting and cash

from operations under cash accounting.

It starts with net income and adjusts for non-cash items.

The direct method is more difficult for users

to understand, but it does not stop approximately 98%

of all US, European, and Canadian companies

from using the indirect method to calculate cash flows

from operating activities.

Why is that?

Because it's easier and less costly to prepare.

One benefit for users of the indirect method

is that it highlights earnings management.

We'll further explore this concept

when we cover the development of the cash flow

statements in a later video.

As you can imagine, we'll be using the statement of cash

flows indirect method for purposes of all of our videos.

The statement of cash flows is divided

into three activities, operating, investing,

and financing.

Description of these activities have already

been covered in a previous video,

but let's just review them.

Financing is activities that fund a company either

through debt or equity.

Investing is activities that result from buying or selling

property, plant, equipment, intangibles, or investments

in other corporations.

Operating activities is when a company does their business

day-to-day, selling and delivering goods or services.

To obtain an in-depth understanding

of these activities, please see my video

on business activities.

Let's do a quick check of your understanding so far.

The payment of interest on a long term loan

is considered either an operating or financing

activity.

IFRS allows prepares to choose where

to place interest payments.

The reason why will be explored in future videos

on developing a statement of cash flows.

Now that we understand the activities

that make up the statement, we can look at an example.

Note that the statement is so large that I've divided it

into two slides so that you can see each activity better.

But the statement is actually one statement.

Although I have set up the statement in columns

for easy viewing, the accounts can all

be listed in one column and the amounts in another.

As always, the statement starts with a heading,

which must include the company name,

the title of the financial statement,

and the period of time covered.

Note, similar to every financial statement except the statement

of financial position, this statement

is for a period of time, most commonly, one year.

Note that profit from the income statement

is the beginning point under the indirect method.

All the other amounts are reconciling

items between profit from the income statement and cash

flow from operating activities.

This includes things such as depreciation

and the change in current asset and liability accounts

from the statement of financial position.

At the bottom of this section, we

see that operating activities resulted in a net cash

inflow of $21,400.

Investing activities are next.

You'll note, there is a net cash outflow of $7,500.

This is due to the purchase of both equipment and investments.

Finally, let's look at financing activities.

Some of the items under financing activities

have a connection to the statement of changes in equity.

Here, we see that the company issued shares as well as

repurchased some.

They also paid dividends.

Let's quickly flip back to the statement of changes in equity

so we can see the relationship.

Both the statement of cash flows and the statement

of changes in equity show a dividend payment of $2,500.

That's because this amount was paid in cash.

In addition, both statements show

an issue of shares of $11,600.

Again, that's because this amount was received in cash.

Note that the repurchase of shares on the statement

of changes in equity is $5,000.

But the outflow on the statement of cash flows was $7,500.

That's because the $5,000 is historical cost,

and the $7,500 on the statement of cash flows was cash.

Further discussions of why these two amounts are different

will be covered in a future video.

Looking at the total from the financing activities,

we can see there was a net outflow of $1,700.

The bottom of the cash flow statement

shows a net change in cash.

This is a summation of all three activities,

operating inflow of $21,400, investing

and financing outflows of $7,500, respectively.

The net increase in cash was therefore $12,200.

Add this to the beginning cash balance of $72,300

and we get the ending cash balance of $84,500.

This amount is a cash balance on the statement

of financial position under current assets.

Again, this is the interconnection

between the statement of financial position

and the statement of cash flows.

Let's take a quick look at the statement of cash flow again.

Remember we start with the appropriate heading and profit

from the income statement.

We move on to the operating activities and then

the investing activities, with the financing activities

listed last.

The net change in cash is then added--

this is when a net inflow is demonstrated, as it is here--

or deducted, if there is a net outflow from the opening cash

balance to obtain the closing cash balance from the statement

of financial position.

Let's check your understanding for a second.

Remember to pause the video to determine your own answer

before continuing.

The president of Greene Corp. announces the company

is expanding into new markets.

You examine the statement of cash flows

and see a net cash outflow from operating activities and inflow

from both investing and financing activities.

Does the statement of cash flows support

the president's announcement?

No.

No, it does not.

A net outflow from operating activities

means cash outflows are greater than inflows.

Since operating activities are the only sustainable source

of cash, this does not support expansion plans.

In addition, an inflow from investing activities

means the company is selling assets,

not buying assets necessary to expand into new markets.

So what questions does the statement of cash flow answer.

For investors, it helps them determine,

in conjunction with the income statement,

if there will be enough cash in the future to pay dividends.

For lenders and other creditors, it

helps them determine if there is cash available to pay debts

as they come due.

It also helps them determine if the company will

need further financing in the future.

Finally, all external users can use the cash flow statement

with the income statement to help predict future cash flows.

We have now completed all the financial statements

under IFRS.

But there is an important addition

to the statements, which we have not

covered, the notes that accompany

the financial statements.

And that will be the topic of our next video.

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